Released last night, the reports indicate a positive uptick in new orders but a significant profit decline. This decline is primarily attributed to a combination of rising inflation and plummeting home prices, which have been affected by increasing interest rates.
 
Lennar, a prominent player in its industry, holds a top-three position among builders in 33 U.S. states. The company enjoys a strong competitive advantage in Florida and Texas, both of which are experiencing substantial population growth.
 
Similar to its counterparts, DR Horton and NVR, Lennar relies heavily on options for land acquisitions. This financial strategy minimizes the risk of long-term asset depreciation.
 
While new construction levels are hovering around historical averages, U.S. Census projections indicate a steady increase in new household formations until at least 2030. Therefore, while the market may not be at its lowest point, and imbalances are not as pronounced as in neighboring Canada, it's reasonable to expect a relatively favorable market for builders in the foreseeable future.
 
Despite a recent slowdown, Lennar performed exceptionally well during the previous cycle, marked by near-zero interest rates following the financial crisis. Sales grew tenfold from 2012 to 2022, and earnings per share increased fivefold. The company has also significantly reduced its financial leverage, and its profitability reached record highs in recent years, indicating a market favoring supply.
 
However, current investor sentiment suggests skepticism about the sustainability of this growth, with valuations at around eight to nine times earnings, compared to the historical average of twelve to thirteen times earnings.
 
While it's unlikely that Lennar will replicate the tenfold sales increase of the past decade, it remains clear that both U.S. and European investors are avoiding the construction sector. Lennar is capitalizing on what it sees as an attractive valuation by repurchasing its shares, and notable investors like Berkshire Hathaway have recently joined its shareholder base.